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Chapter 2
Measurement
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 1
Measurement versus Theory
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Measurements of the performance of the
economy.
GDP, prices, savings, wealth, capital and labor.
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Build simple models to explain how the
economy works.
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 2
Notation
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GDP
Price level
Consumption
Investment
Gov Spending
Taxes
Exports
Y
P
C
I
G
T
X
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
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Imports
Exchange Rate
Net Exports
Saving
Capital
Employment
Unemployment
IM
ER
NX
S
K
E
UE
Slide 3
Measuring Gross Domestic Product GDP
The dollar value of the final output
produced during a given period of time
within the borders of the United States.
Published on a quarterly basis.
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 4
Three approaches to measuring GDP
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Value Added Approach (Product Approach)
Income Approach
Expenditure Approach
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 5
Example Economy
Economic Agents
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Corn producer
Hog producer
Consumers
Government
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 6
Setup
Corn Producer
Price $2 bushel
10 million bushels
4 m bushels
Consumer
6 m bushels
Hog producer
Price $1.5 lb.
20 m lb. of hogs
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 7
Table 2-1 Corn Producer
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 8
Table 2-2 Hog Producer
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 9
Table 2-3 After-Tax Profits
After-tax profits
=
Total Revenue – Wages – Interest – Cost of
Intermediate inputs - Taxes
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 10
Table 2-4 Government
$ 4.5 m from producers and $ 1 m from consumers
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 11
Table 2-5 Consumers
$ 5 m (Corn) + $ 4 m (Hog) + $ 5.5 m (Gov)
Sum from Table 2.3 After-Tax Profits
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 12
Table 2-6
GDP – Product Approach
How much value to you add to the final product?
The sum of value added goods and services in production across
all productive units in the economy
Evaluate the
bridge at the
cost of
inputs
Table 2-2 Hog Producer
Value added
$ 30 - $ 12
= Value of final goods – value of intermediate goods
EXPLAIN WHY?
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 13
Table 2-7
GDP – Expenditure Approach
How much did you spend?
The total spending on all final goods and services production in
the economy
Include
Inventory
Purchased
the bridge
at $ 5.5 m
$ 8 m on Corn + $ 30 m on Hogs
Total Expenditure = C + I + G + NX
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 14
Table 2-8
GDP – Income Approach
How much did you earn?
Add up all incomes received by economic agents contributing to
production
Taxes paid by producers
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 15
All approaches are equal
Total output is ultimately sold.
Total Output is also Total Income.
Income-Expenditure Identity
Y = C + I + G + NX
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 16
Inventories: Redo the same example with 3
million bushels of Corn kept as inventories
Corn Producer
Price $2 bushel
13 million bushels
3 m bushels
4 m bushels
Inventories
Consumer
6 m bushels
Hog producer
Price $1.5 lb.
20 m lb. of hogs
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 17
Table 2-9
Components of GDP
Expenditure Approach
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 18
Table 2-10 Real vs. Nominal GDP
Nominal
year 1
Nominal
year 2
Compute Real GDP for year 2
• year 1 as base
• Chain-weighted
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 19
Figure 2-2 Nominal GDP (black line) and Chain-Weighted Real
GDP (colored line) for the Period 1947-1999
REAL GDP
= NOMINAL GDP / PRICE LEVEL
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 20
Table 2-11
Base Year vs. Chain-weighting
Methods to Compute Inflation
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 21
Figure 2-3 Inflation Rate Calculated from the CPI (colored line),
and Calculated from the Implicit GDP Price Deflator
(black line)
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 22
ASSIGMENT II

Consider an economy with a widget producer, consumers
and a government. The widget producer, produces 100
millions widgets which sell at a market price of $5 per
widget. 70 million widgets are purchased by consumers,
10 million are sold to the government and the remainder is
stored as inventory. The widget producer pays $150
million in wages and $40 million in taxes. Consumers pay
$30 million in taxes. The government spends all tax
revenues to hire workers and purchase widgets as an
intermediate good into the production of public
infrastructure. The widgets total $50 million and wages
total $20 million. Calculate GDP using the product
approach, expenditure approach and income approach.
Copyright © 2002 by O. Mikhail , Graphs are © by Pearson Education, Inc.
Slide 23